Research conducted by Canada Life shows that one in ten workers have paused pension contributions citing redundancy, furlough, or essential spending taking priority.
Renny Biggins, head of retirement at The Investing and Saving Alliance (TISA) says: “Undoubtedly, Covid-19 is placing a strain on household finances, especially for lower earners and those in the sectors particularly hard hit, such as hospitality. This strain will be amplified as the furlough scheme comes to an end at the end of next month and job losses begin to rise steeply.
“People may simply not have enough disposable income to make contributions and still meet general household costs without accruing debt. Immediate priorities will take precedence over those which are further away and for some, it will make financial sense to opt out for the time being.”
Impact of three-year pension holidays
Analysis by Canada Life has looked at the implications three-year pension holidays would have for individuals at age thirty, forty and fifty at different earning and contribution levels. Opting out of an automatic enrolment scheme will see people re-enrolled three years later unless they make an active choice to re-join in the meantime.
The analysis reveals that a thirty-year-old earning £30,000 could lose over £45,000 from the value of their pension by opting out of a pension for just three years. This would result in a drop in value of the pension at age 67 of over 9%, or £45,000 less at retirement.
To have the best chance of making up the shortfall they would need to increase the total pension payments by just below 9%, an additional contribution of nearly £13,000, which could be made through additional employer contributions, employee contributions or a combination of both.
The results become starker as an individual gets closer to retirement. For example, a fifty-year-old earning £100,000 a year with an existing pension valued at £100,000 could see their pension pot fall by over £70,000, or just over 11% after a three-year pension contribution holiday.
What the experts say
Paul Green, CEO and Founder of Over50sMoney: “Stopping pension contributions should be a last resort. To maximise the value of your pension you should start saving as early as possible and keep making contributions. Compound interest is usually a key factor determining the final value of your pension. This means it is important to keep paying into your scheme. If you are struggling financially, make all the savings you can elsewhere before you look to stop your pension contributions.”
Toby Band, head of global advice at Arlo International thinks it is a mistake to stop pension contributions: “The earlier an individual starts saving towards their pension, the more they’ll reap the rewards of their retirement savings later down the line. The value of money changes over time, so if someone is investing £1,000 into their pension now, that amount is highly likely to be worth more than £1,000 in the future due its potential earning capacity. Conversely, those who don’t start saving early may be forced to work for longer than they wanted to, or live a less comfortable retirement as not enough money was accumulated for the retirement they want to enjoy.
“Additionally, when it comes to pension investments, an individual who hasn’t saved enough may have or feel the need to take on more risk than they want to make up for opportunities that had been missed earlier in life. The worst-case scenario for those who don’t contribute enough to pensions is that they run out of funds altogether before they die, which is a position no one wants to find themselves in.
“The economic impact of Covid-19 also means that savers should make the most of pensions contributions and the benefits currently being received. In particular, pension tax relief can help to boost savings, yet costs the Treasury £40bn a year and could be cut in order to fund the recovery from the pandemic.”